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Ethical Responsibility of Tax Professionals

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Ethical Responsibility of Tax Professionals

  1. 1. www.FridayFirm.com Tax Update Seminar November 13, 2019 Taylor A. Stockemer Ethical Responsibility of Tax Professionals
  2. 2. www.FridayFirm.com Public Opinion: Honesty/Ethics in Profession Top Professions - Nurses - Pharmacists - Doctors - Teachers - Police - Clergy - Funeral Directors CPAs More than 1/3 of Public ranks CPAs as above average or high to very high More than 50% of Public ranks CPAs as average Attorneys Less than 20% of Public ranks attorneys as above average or high to very high Less than 50% of Public ranks attorneys as average More than 1/3 of Public ranks attorneys as very low Who ranks lowest? - Congress - Car salesman - Telemarketers - Lobbyists
  3. 3. www.FridayFirm.com - Governed by Arkansas State Board of Public Accountancy - Board Members consist of: - CPAs - Public, non-CPA representatives Accountant Code of Professional Conduct
  4. 4. www.FridayFirm.com - Arkansas Rules of Professional Conduct - Governed by Arkansas Supreme Court and the Office of the Committee on Professional Conduct - Office has director, deputy director, and two staff attorneys - Committee has 4 panels, on which each has 7 members – 5 attorneys and two non-attorneys Attorney Rules of Professional Conduct
  5. 5. www.FridayFirm.com CPA Violation of Code of Professional Conduct - Investigations performed by Arkansas State Board of Public Accountancy investigator under supervision of Board’s Compliance Committee (Rule 11.1) - If minor violation, can be disposed of informally by correspondence - CPA has no rights during investigation, but can make a statement after a finding recommendation by the Committee to be considered - Committee Recommendation (Rule 11.2) - Will determine either probable cause, no probable cause, or additional investigation required - If no probable cause, final finding - If probable cause, disciplinary action, action under statutes, or other appropriate action
  6. 6. www.FridayFirm.com Attorney Violation of Rules of Professional Conduct Rule 8.5 - Investigations are performed by the Arkansas Supreme Court – Office of Professional Conduct and the Committee on Professional Conduct - Following review, if sufficient cause is found, a formal complaint will be filed - Attorney will be provided notice and have opportunity to respond - Complainant will have opportunity to rebut attorney’s response - Committee will determine final action, and can have a public hearing if necessary
  7. 7. www.FridayFirm.com Ethical Violation Repercussions - Sanctioned/Censured - Suspended - Terminated/disbarred - Fined (in addition to above generally) - Malpractice claim by client
  8. 8. www.FridayFirm.com Review of Certain Ethical and Legal Requirements Applicable to CPAs and Attorneys - Competence - Confidentiality - Representation to Public (firm name, advertising, etc.) - Conflicts - Misconduct Implications/Violations of Rules - Malpractice Claim Review
  9. 9. www.FridayFirm.com Accountants - Rule 201: the licensee shall undertake only those professional services that can reasonably be expected to be completed with professional competence Attorneys - Rule 1.1: a lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation necessary for the representation Ethical Obligation: Competence
  10. 10. www.FridayFirm.com - The standard is objective and based upon a reasonable attorney or accountant - The professional must act in good faith - Typically, violation occurs due to negligence Legal Obligation: Standard of Care/Duty
  11. 11. www.FridayFirm.com Ethical Obligation: Confidentiality Accountants - Rule 301: A licensee shall not without the consent of his or her client disclose any confidential information pertaining to his or her client obtained in the course of performing professional services Attorneys - Rule 1.6: A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, or the disclosure is permitted by the rules (such as preventing the commission of a criminal act, prevent client from committing fraud, etc.)
  12. 12. www.FridayFirm.com Legal Obligation: Duty to Client - “Intentional” Violation of Standard of Conduct – not mere negligence - Generally, this is a breach of your duty of loyalty to your client - Violating a client’s confidences is a breach of your fiduciary duty to your client
  13. 13. www.FridayFirm.com Accountants - Rule 401: A licensee shall not commit any act discreditable to the profession Attorneys - Rule 8.4: It is professional misconduct to violate the rules of professional conduct; commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer; engage in conduct involving dishonesty, fraud, deceit or misrepresentation; engage in conduct that is prejudicial to the administration of justice; or state or imply an ability to influence improperly a government agency or official Ethical Obligation: Discreditable Acts/Misconduct
  14. 14. www.FridayFirm.com Legal Obligation: Breach; Fraud - Breach (Malpractice) - Negligence - Breach of Fiduciary Duty - Breach of Contract - Fraud - Intentional acts - Not considered malpractice, and therefore not covered by malpractice insurance - Often claimed when professional attempts to cover up or conceal what was originally negligence or breach of fiduciary duty - Will likely toll the statute of limitations against the professional
  15. 15. www.FridayFirm.com Ethical Obligation: Firm Name Accountants - Rule 404: Name cannot be misleading as to the legal form of the firm or as to the persons who are partners (past partners can continue to be in name); fictitious firm name allowed only if approved by Board; “associates” or “company” cannot be used unless at least 2 full-time CPAs on staff Attorneys - Rules 7.1 and 7.5: Name cannot be false or misleading; trade name allowed if not misleading and does not imply a connection with a government agency or public or charitable legal services organization; lawyers in the office must be identified; no lawyer holding public office can remain as part of the firm name; name cannot imply partnership, association, etc., unless it actually is one Unlikely to be a Legal Infraction
  16. 16. www.FridayFirm.com Ethical Obligation: Conflicts Accountants - Rule 102: in performing professional services, a licensee shall be free of conflicts of interest Attorneys - Rules 1.7, 1.8, 1.9. 1.10: no concurrent conflicts of interest (with exceptions), no personal benefit from the client (solicitation of gifts, literary or media rights to portrayal or account based upon representation, providing financial assistance to client, client waiving right to sue for malpractice, sex); cannot be directly adverse to parent, child, sibling or spouse (as opposing counsel) without informed consent by client in writing; cannot be adverse to former client if attorney has information material to the matter from the former client; applies to all lawyers in same firm
  17. 17. www.FridayFirm.com Legal Obligation: Conflicts What is cause of action? - Negligence (maybe) - Breach of Duty - Did you breach confidentiality between clients? - Did representing both result in a breach of your duty of loyalty? - Did your actions in representing both result in damages to client(s)? - Fraud - Did you actively conceal the conflict? - Did you purposely attempt to benefit one client over the other?
  18. 18. www.FridayFirm.com Accountants: No specific rule other than 102 Attorneys: Rule 1.13 - A lawyer employed by an organization represents the organization through its duly authorized constituents Conflicts in Business Transactions
  19. 19. www.FridayFirm.com Who is the Client in a Business Transaction? Formation - Representing the Entity to Be Formed - One of the Members of the Entity to be Formed and the Entity once formed - One of the Members but not the Entity once formed Commencement of Business - Who do you represent – re- establish relationship(s) as necessary - Representation may change as organization changes Representing the Organization, not the Constituents - Communication is privileged if communicated by constituent in person’s official capacity (board member, president, etc.) - Lawyer is directed by entity leaders - Lawyer should be clear at all times that representation is with entity, not an individual
  20. 20. www.FridayFirm.com Communicating Conflicts - Get necessary information from parties involved to determine conflict - What are clients’ expectations (who expects to be represented, what is scope of representation)? - Written confirmation or declination of representation; written waiver of any conflict - If written waiver of conflict, make sure the interests are (relatively) aligned - State who you are and are not representing - Outline confidentiality between parties, if any
  21. 21. www.FridayFirm.com What is Your Role? - Advisor? - Agent? - Advocate? - What is the scope of your advice? - Are you the registered agent for the organization? - Are you the IRS/DFA representative/contact for the organization? - Arbiter of disputes between organization and constituents? - How to address new management/ownership issues (privilege/confidentiality, obligation to inform management of various matters, obligations to prior management)
  22. 22. www.FridayFirm.com Entity Bad Actors - If entity leader is violating his duties and obligations to entity, in a manner that is likely to result in substantial injury to the entity, attorney shall proceed as is reasonably necessary in the best interests of the organization - Highest authority that can act on behalf of entity should be given opportunity to remedy, but if not, and attorney believes the violation is reasonably certain to result in substantial injury to the entity, then information can be revealed, even though privileged - Presumably, similar obligation on the part of the CPA
  23. 23. www.FridayFirm.com Conflicts in Estate Planning/Tax Planning and Preparation Joint Representation - Spouses - Joint fiduciaries (executors, trustees) Other Firm Clients - Other family members or business partners - Entity and individual constituent(s) Client Incapacity - Individual with power granted by valid and unrevoked power of attorney - Individual with power granted by legal guardianship - Individual without any actual legal authority
  24. 24. www.FridayFirm.com - A violation of the Code of Professional Conduct/Rules of Professional Conduct is not necessarily malpractice - Malpractice is almost always a violation of the Code of Professional Conduct/Rules of Professional Conduct When does an Ethical Violation become Malpractice?
  25. 25. www.FridayFirm.com Why? - CPAs and Attorneys are held to high ethical standards. Mistakes will be made – mistakes in judgment, in professional services, etc. These do not necessarily rise to the level of malpractice. - For malpractice, the plaintiff must prove: - There is a professional-client relationship - The professional had a duty or obligation to the client - The professional breached that duty (violation of Code/Rules can be used as evidence, but it is not alone determinative of malpractice) - The breach resulted in damage to the client - The damage is the proximate cause of the breach of the duty - There are no defenses to the malpractice (statute of limitations, etc.)
  26. 26. www.FridayFirm.com Examples of CPA Sanctions Suspension - Failure to exercise due professional care - Failure to maintain adequate documentation - Failure to maintain independence as auditor with business - Failure to properly identify company risks, inventory, or substantiation in audit Termination - Conviction - false statements regarding employee benefit plan - Conviction – filing false tax returns - Conviction – misuse of company funds for purchase of gift cards, trips, gifts, etc. - Audit of Accounting Company – CPA provided altered documents to Board for review
  27. 27. www.FridayFirm.com Examples of Attorney Sanctions Censure (Warning, Caution, Reprimand) - Representing husband and wife in stepparent adoption; then husband in divorce (conflict) - Missed statute of limitations and did not tell client for more than a year Suspension - Used trust funds personally - Missed deadlines - Improper supervision of subordinates - Failure to refund unearned retainers - Failure to respond to Board disciplinary complaint Disbarment - Concealment of material facts from client - Lying under oath - Accepted settlement, forged client’s name to settlement and settlement check, did not inform client
  28. 28. www.FridayFirm.com Examples of Malpractice Claims Personal Income Tax Planning - Divorce-related planning - Retirement plan contributions/distribu tions - Long-term capital gain planning Business Income Tax Planning - Reorganizations, stock redemptions - NOLs - S corporations – qualifications, distributions - Qualified Plans Estate/Gift Planning - Drafting and planning errors - Defective Elections - Valuation Errors - Improper/Incomplete Gift or Estate Tax Returns
  29. 29. www.FridayFirm.com - Know the Code of Professional Conduct/Rules of Professional Conduct and your obligations - Avoid “gray” areas to extent possible - Be selective in accepting new clients - Written acceptance or declination is good practice – if accepting, outline scope of engagement - Be mindful of all deadlines and filing dates Avoiding Ethical Violations and Malpractice Claims
  30. 30. www.FridayFirm.com www.FridayFirm.com 400 West Capitol Ave. Suite 2000 I Little Rock, AR 72201 3425 North Futrall Dr. Suite 103 I Fayetteville, AR 72703 3350 South Pinnacle Hills Pkwy. Suite 301 I Rogers, AR 72758 TAYLOR A. STOCKEMER Mergers & Acquisitions 501-370-1445 tstockemer@fridayfirm.com www.fridayfirm.com/attorney/ tstockemer

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